Evergrande to wreak havoc in Chinese property sales and drive mergers and acquisitions


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HONG KONG – Debt Crisis Engulfing China Evergrande Group has started to rattle homebuyer sentiment and force developers to cut prices, signaling deeper consequences for the world’s No.2 economy and consolidation in the overcrowded real estate sector.

Evergrande, which embodies the business model of borrowing to build, is choking less than $ 305 billion in debt and has stopped paying some investors and suppliers and has halted construction work on many projects across the country.

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What quickly became the biggest headache for Chinese companies has now shattered consumer confidence in real estate investing as cash-strapped Evergrande struggles to complete real estate developments for buyers.

As contagion fears of a possible collapse of Evergrande have depressed global financial markets, analysts believe the real estate sector, which accounts for a quarter of the country’s gross domestic product, could be the hardest hit.

“This is not China’s Lehman moment that we should be worried about. It’s a sharp drop in real estate sales, ”said Mark Williams, Chief Economist at Capital Economics for Asia, referring to the 2008 collapse of US investment bank Lehman Brothers.

Evergrande moved closer to the potential default investors feared on Friday, missing a payment deadline in one of the clearest indications yet that the developer, whose debt woes have spooked markets, is in big trouble. difficulty.

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The developer is now reimbursing certain suppliers, as well as private investors, in its opaque wealth management products, in part in real estate completed in an effort to ease social tensions.

“This is not the first time that a developer has used real estate to pay their suppliers,” said Centaline Shenzhen real estate agent general manager Alan Cheng. “But this is the first time that homebuyers have realized that a big developer like Evergrande can also collapse – they think there must be something wrong with this market.”

He said buyer sentiment has turned pessimistic, resulting in low trading volumes and confirming a downtrend in the market.

Adding pressure on house prices, Cheng said other developers, including Kaisa and state-backed China Resources Land, have reduced sales prices in the southern city of Shenzhen after a 30% promotion. Evergrande in May.

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Kaisa said he did not have a comment on the price cuts, while China Resources Land did not respond to the request for comment.

Growth in real estate sales by floor space in China in the first eight months slowed to 15.9% from a year earlier, from 21.5% in the first seven months as the industry was hit hard by a shortage of liquidity. Growth was 105% year-over-year in the first two months of 2021, going from a low base in 2020 when sales were affected by the COVID-19 pandemic.

WILL OF CONSOLIDATION

Nomura said the decline in new home sales accelerated in the first two weeks of September, dropping from August to 16%, and 49.5% from the previous year for level cities. upper and lower, while it fell to 15.5% for level 2 cities.

Capital Economics China Senior Economist Julian Evans-Pritchard said the Evergrande crisis had a much bigger impact on housing demand than it had expected and households had become much more cautious, causing prices to fall.

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He said if most developers would be able to cope with weaker sales for six months, a broader shift in real estate sales triggered by negative sentiment would be more concerning.

To resist the crisis, the sector should experience a wave of consolidation in the short term, according to some analysts.

The Chinese real estate market has been extremely fragmented, with around 50,000 developers at most. Since many were small and shoddy, Beijing is also keen to promote consolidation, analysts said.

Guangzhou-based No.3 developer China Vanke and KWG Group said at their earnings talks last month that they were considering mergers and acquisitions to acquire land from struggling peers, as prices are rising. often less expensive than during public land auctions.

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Vanke said he has been in talks with Evergrande in recent months over project cooperations and acquired three projects from Sichuan Languang Development, a smaller developer that defaulted in July.

Country Garden Services, the property management unit of developer Country Garden, announced Monday that it has agreed to buy Wealth Best Global, a branch of Guangzhou R&F Properties Co, for 10 billion yuan ($ 1.55 billion).

“Consolidation will certainly accelerate in the current context of the credit crunch,” said an executive at an east China-based developer, adding that he was currently studying a few projects.

“If a company in a cash crunch doesn’t sell its assets quickly when the problem first appears, it can collapse like Evergrande,” the executive said, declining to be named because he was not authorized to talk to the media.

(Reporting by Clare Jim; Editing by Sumeet Chatterjee and Nick Macfie)

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In-depth reporting on The Logic’s innovation economy, presented in partnership with the Financial Post.

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